What is finance charge

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Experian does not support Internet Explorer. But what exactly do finance charges include, how are they calculated, and can they be avoided? Put simply, a finance charge is any charge associated with using credit. When your card issuer sends you your monthly statement, it lists any finance charges along with your purchases and payments. How your finance charge shows up on your statement will depend on your card issuer. For example, it might be listed in a separate finance charge category, or the statement might just list all the components that make up a finance charge e.

Finance charges include any fees paid to the lender, such as: 2. Most other fees are usually flat fees, such as annual fees or late fees. Some credit cards may charge flat fees for cash advances or balance transfers, too.

Other finance charges, such as foreign transaction fees, are typically calculated as a percentage of the transaction value. With any kind of credit, finance charges help lenders cover the nonpayment risk of extending credit and give them a way to make money by lending money.

With loans and mortgages, finance charges can include a one-time loan origination fee as well as interest payments. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge.

A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available. See interpretation of Paragraph 4 c 5 in Supplement I. Lost interest. Certain Federal and state laws mandate a percentage differential between the interest rate paid on a deposit and the rate charged on a loan secured by that deposit. In some situations, because of usury limits the creditor must reduce the interest rate paid on the deposit and, as a result, the consumer loses some of the interest that would otherwise have been earned.

This rule applies only to an interest reduction imposed because a rate differential is required by law and a usury limit precludes compliance by any other means. If the creditor imposes a differential that exceeds that required, only the lost interest attributable to the excess amount is a finance charge.

See interpretation of Paragraph 4 c 6 in Supplement I. The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount:. Real estate or residential mortgage transaction charges. The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor's employees rather than by a third party. In addition, the cost of verifying or confirming information connected to the item is also excluded.

For example, credit-report fees cover not only the cost of the report but also the cost of verifying information in the report. Lump-sum charges. If a lump sum charged for several services includes a charge that is not excludable, a portion of the total should be allocated to that service and included in the finance charge.

The entire charge is excluded even if a fee for the incidental services would be a finance charge if it were imposed separately. Charges assessed during the loan term. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected.

For example, a fee for one or more determinations during the loan term of the current tax-lien status or flood-insurance requirements is a finance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.

Timing of disclosures. Premium rate increases. The creditor should disclose the premium amount based on the rates currently in effect and need not designate it as an estimate even if the premium rates may increase.

An increase in insurance rates after consummation of a closed-end credit transaction or during the life of an open-end credit plan does not require redisclosure in order to exclude the additional premium from treatment as a finance charge.

Unit-cost disclosures. Open-end credit. The premium or fee for insurance or debt cancellation or debt suspension for the initial term of coverage may be disclosed on a unit-cost basis in open-end credit transactions. The cost per unit should be based on the initial term of coverage, unless one of the options under comment 4 d is available.

Closed-end credit. Required credit life insurance; debt cancellation or suspension coverage. Whether the insurance or coverage is in fact required or optional is a factual question. If the insurance or coverage is required, the premiums must be included in the finance charge, whether the insurance or coverage is purchased from the creditor or from a third party.

If the consumer is required to elect one of several options - such as to purchase credit life insurance, or to assign an existing life insurance policy, or to pledge security such as a certificate of deposit - and the consumer purchases the credit life insurance policy, the premium must be included in the finance charge. If the consumer assigns a preexisting policy or pledges security instead, no premium is included in the finance charge. Other types of voluntary insurance. Insurance is not credit life, accident, health, or loss-of-income insurance if the creditor or the credit account of the consumer is not the beneficiary of the insurance coverage.

Property insurance. To exclude property insurance premiums or charges from the finance charge, the creditor must allow the consumer to choose the insurer and disclose that fact. This disclosure must be made whether or not the property insurance is available from or through the creditor.

The requirement that an option be given does not require that the insurance be readily available from other sources. The premium or charge must be disclosed only if the consumer elects to purchase the insurance from the creditor; in such a case, the creditor must also disclose the term of the property insurance coverage if it is less than the term of the obligation.

Single-interest insurance. Blanket and specific single-interest coverage are treated the same for purposes of the regulation. A charge for either type of single-interest insurance may be excluded from the finance charge if:. The insurer waives any right of subrogation. This includes, of course, giving the consumer the option of obtaining the insurance from a person of the consumer's choice.

The creditor need not ascertain whether the consumer is able to purchase the insurance from someone else. Single-interest insurance defined. The term single-interest insurance as used in the regulation refers only to the types of coverage traditionally included in the term vendor's single-interest insurance or VSI , that is, protection of tangible property against normal property damage, concealment, confiscation, conversion, embezzlement, and skip.

Some comprehensive insurance policies may include a variety of additional coverages, such as repossession insurance and holder-in-due-course insurance. If a policy that is primarily VSI also provides coverages that are not VSI or other property insurance, a portion of the premiums must be allocated to the nonexcludable coverages and included in the finance charge.

Initial term. The initial term of insurance or debt cancellation or debt suspension coverage determines the period for which a premium amount must be disclosed, unless one of the options discussed under comment 4 d is available. For example: A. The initial term of a property insurance policy on an automobile that is written for one year is one year even though premiums are paid monthly and the term of the credit transaction is four years.

The initial term of an insurance policy is the full term of the credit transaction if the consumer pays or finances a single premium in advance. Initial term; alternative. A creditor has the option of providing cost disclosures on the basis of one year of insurance or debt cancellation or debt suspension coverage instead of a longer initial term provided the premium or fee is clearly labeled as being for one year if:.

The initial term is indefinite or not clear, or. The consumer has agreed to pay a premium or fee that is assessed periodically but the consumer is under no obligation to continue the coverage, whether or not the consumer has made an initial payment.

Open-end plans. For open-end plans, a creditor also has the option of providing unit-cost disclosure on the basis of a period that is less than one year if the consumer has agreed to pay a premium or fee that is assessed periodically, for example monthly, but the consumer is under no obligation to continue the coverage.

A credit life insurance policy providing coverage for a year mortgage loan has an initial term of 30 years, even though premiums are paid monthly and the consumer is not required to continue the coverage. Disclosures may be based on the initial term, but the creditor also has the option of making disclosures on the basis of coverage for an assumed initial term of one year.

Loss-of-income insurance. Premiums for credit life, accident, health, or loss-of-income insurance may be excluded from the finance charge if the following conditions are met:. If the term of insurance is less than the term of the transaction, the term of insurance also shall be disclosed. Any consumer in the transaction may sign or initial the request.

Premiums for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, including single interest insurance if the insurer waives all right of subrogation against the consumer, may be excluded from the finance charge if the following conditions are met:. A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer.

If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed. Charges or premiums paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation or for debt cancellation or debt suspension coverage in the event of the loss of life, health, or income or in case of accident may be excluded from the finance charge, whether or not the coverage is insurance, if the following conditions are met:.

Creditors may use the model credit insurance disclosures only if the debt cancellation or debt suspension coverage constitutes insurance under state law. Robo Advisor and Crypto Picks. Mortgages Top Picks. Insurances Auto Insurance. Loans Top Picks. Thinking about taking out a loan? Knowledge Knowledge Section. Recent Articles. The Ascent Best Credit Cards. What Is a Finance Charge?

What is a finance charge? How your credit card finance charge is calculated Your credit card finance charge depends on a few factors -- specifically, your annual percentage rate , or APR, the amount of your debt, and the amount of time in the billing cycle. First, your APR is divided by or in certain cases to determine your daily rate.

For example, a credit card APR of Next, the daily interest rate is multiplied by the number of days in the statement billing cycle to determine your interest rate for each particular finance charge. Continuing the previous example, if there were 30 days in the billing cycle, a